Honey, I Shrunk the Store

As the U.S. economy shows signs of new growth in 2012, many quick serves are cautiously looking at expansion plans to see if they can jumpstart the growth that stalled with the recession.

Some franchise concepts are banking on the fact that cheaper, smaller footprints might be more attractive to potential franchisees in this rocky lending environment. One in particular, Philly Pretzel Factory, is hoping a new kiosk offering will draw new franchise partners and excite its existing franchisee base.

The 111-unit chain based in Philadelphia built its brand of fresh-baked pretzels with storefront locations in freestanding buildings and strip malls. Now it’s downsizing with a plan that will give franchisees the option of buying into a traditional store or opening a portable Philly Pretzel Factory kiosk.

“We’ve been over this concept many times and with many people and it just feels like a winner for us,” says Philly Pretzel Factory president Marty Ferrill. “It introduces what we do to a different group of customers, so we feel like the kiosks will ultimately enhance our brand.”

Ferrill says a major part of the company’s traditional business model has been bulk sales with many customers purchasing large quantities of pretzels for office parties or fundraisers.

“With the kiosks, we’re putting them in malls, transit stations, airports—just about any area where you have a high amount of pedestrian traffic,” he says. “In that case, most of the sales will be individual, and they’ll be primarily impulse buys.”

The U-shaped kiosks are designed to look like a smaller-scale version of a Philly Pretzel Factory store. Instead of the usual oven that fits 16 trays, the kiosk oven fits four. About 35 pretzels can be baked at a time, which should meet anticipated demand.

“If we had to, we could fill a very large order from a kiosk, but the focus will be on individual customers,” he says.

Kiosks will initially be offered to established Philly Pretzel Factory franchisees. Ferrill says many franchisees have already ordered kiosks as a compliment to their storefront business. After kiosks are offered to existing franchisees, they’ll be available for new franchisees looking to break into the brand.

The franchise and equipment fees for a Philly Pretzel Factory kiosk are less than $100,000; for an average store, that number is about $250,000.

“Funding may have loosened a bit, but it’s still a rough game out there in the lending world,” says Chris Allison, a franchise-business marketing consultant with Stone Ward in Little Rock, Arkansas. “If people see that you’re offering great value and opportunity for that price, they’ll take it, which is why lots of companies are looking to the kiosk concept to expand.”

“If franchisees see that you’re offering great value and opportunity for that price, they’ll take it.”

Besides the smaller footprint and downsized staff (Philly Pretzel Factory recommends two to three crew members), another advantage of the kiosk is its mobility.

“It’s possible for a franchisee to sign a lease with a mall for six months, and if that doesn’t work out they can pack everything up and move it someplace else,” Ferrill says. “You can go where the business is. You can’t do that with a traditional storefront.”

Joel Libava, a franchise consultant based in Cleveland, says there are still challenges for the kiosk strategy, particularly in malls. He says many mall landlords know how valuable their property is.

“I’m shocked at how some malls, even though foot traffic is down to historically low levels, are still charging $5,000–$6,000 per month for a kiosk during the holidays,” he says. “You’ve got to really know the nuts and bolts of how many pretzels you’ve got to sell each day to break even in order to make those kinds of rents.”

Ferrill, though, says his company’s real estate department assists with lease negotiations to make sure operators aren’t given the short end of the stick.

“We evaluate locations and we help franchisees find one that fits their needs,” he says. “With malls it’s easier than it was five years ago. They want us, because a popular kiosk will help keep customers shopping.”

Ferrill isn’t concerned about the decline in the number of mall shoppers in recent years. “The aroma of the pretzels in the ovens spreads across the mall, and then there’s the proximity—you have to walk right past it,” he says. “That’s why we think this will be a winner.”